Greater Toronto Airports Authority plans to refinance C$500 million ($512 million) of debt in the next seven months as it seeks to cut borrowing costs amid investor concern that rising oil prices and increased competition will crimp revenue.
GTAA’s 10-year notes maturing Jan. 30 pay a 6.25 percent coupon, 95 basis points more than the last securities sold by the company in February. The planned transaction will be the airport operator’s only other debt sale this year because it has enough cash on hand to finance operations, Treasurer Todd McIntosh said.
The refinancing will be “most likely toward the end of the year,” McIntosh said in a telephone interview from Toronto. “You never like to scramble into the capital markets in the weeks before a bond maturity.”
GTAA debt has underperformed Bank of America Merrill Lynch’s Canadian Corporate Index since the start of the year. Yields on GTAA’s notes compared with Canadian government securities have widened by seven basis points to 124 basis points as of yesterday, while average spreads on the index narrowed by seven basis points to 128. The Bank of America Merrill Lynch index tracks 762 securities with a par value of C$309 billion, including 12 GTAA bonds.
The company operates Toronto’s Pearson International Airport, the biggest of the two passenger airfields that serve Canada’s most populous city and financial hub. Having completed a C$355 million terminal redevelopment last year, the company has no major expansion work planned until at least 2014, depending on how quickly passenger traffic climbs.
‘Pressure on Spreads’
GTAA’s sale of C$600 million in 5.3 percent 30-year bonds in February “put a little bit of pressure on spreads” by adding to the supply of bonds, said James Dutkiewicz, who manages the C$721 million Signature Canadian Bond Fund at CI Financial Corp. in Toronto.
Investors are also concerned about rising oil prices, which may lead airlines to boost air fares and curtail consumer demand, said Jason Parker, head of Canadian fixed income research at BMO Capital Markets in Toronto. Brent oil futures have gained about 18 percent this year through yesterday.
“Any time you have an increase in oil prices, investors get a little bit cautious,” Parker said. “Airline traffic is a discretionary expense and there is a strong relationship between airfares and demand.”
GTAA had long-term debt of C$7.37 billion as of March 31, up from C$7.3 billion three months earlier. The company’s debt is rated A by Standard & Poor’s and DBRS Ltd., and A2 by Moody’s Investors Service. All three ratings are investment grade.
Barrick Gold Sale
Elsewhere in credit markets, Barrick Gold Corp. sold $4 billion of debt in four maturities, according to Bloomberg data. The Toronto-based miner sold $700 million of three-year notes that were priced to yield 90 basis points than comparable government debt; $1.1 billion of five-year securities at a spread of 115 basis points; $1.35 billion of 10-year notes at 130 basis points more than benchmarks and $850 million of 30- year debt at a spread of 150 basis points.
Corporate bond yields fell to 3.78 percent yesterday, from 3.8 percent on May 23. Canadian corporate bonds have gained 2.32 percent since the start of the year, compared with a gain of 1.29 percent for Canadian government bonds, according to Bank of America Merrill Lynch data.
Government Bonds
Yields on five-year Government of Canada bonds were little changed at 2.42 percent yesterday. The difference between yields on five-year Canadian government bonds and U.S. Treasuries of the same maturity widened by two basis points to 65.
In the provincial bond market, relative yields widened to 54 basis points yesterday, from 53 on May 23. Yields fell to 3.22 percent from 3.25 percent. The securities have gained 1.51 percent this year.
Saskatchewan had its credit rating raised one level by S&P to AAA from AA+, which cited the western Canadian province’s “low and declining” debt. Saskatchewan’s “tax-supported” debt amounted to 39 percent of the province’s fiscal 2010 revenue, a figure that S&P said will probably drop to 35 percent in the next year. AAA is S&P’s highest rating.
Ontario sold C$110 million in floating-rate securities due June 2016. The coupon on the five-year floating rate notes will be set quarterly at 18 basis points greater than the Canadian Dealer Offered Rate, known as CDOR.
About 7.9 million passengers travelled through Pearson in the first three months of 2011, a 5.1 percent increase over the same period in 2010, GTAA said May 18. U.S. and international passengers accounted for almost two-thirds of Pearson’s traffic.
Billy Bishop
Investors will be watching for signs that the Billy Bishop island airport -- which Air Canada (AC/A) started serving May 1 -- is cutting into domestic passenger traffic at Pearson, said Robert Follis, head of corporate bond research at Scotia Capital in Toronto.
Air Canada competitor Porter Airlines, which flies exclusively out of the downtown airport, said May 4 that miles flown by paying passengers rose 26 percent in April compared with the same month last year. Most of the cities Porter serves are in Canada, though it also flies to U.S. destinations such as Chicago and Newark, New Jersey.
“Every time someone flies Porter, it means one less domestic customer for Air Canada out of Pearson,” said Follis. “It’s not a credit mover, it won’t affect Pearson’s cross- border traffic in a huge way, but it is something to watch.”
GTAA had C$173.1 million of cash and C$43.2 million of accounts receivables as of March 31. That’s sufficient to fund the company’s capital expenditures, which will probably average C$180 million annually until at least 2013, McIntosh said.
“Some of our money in the bank will go toward partial repayment” of the 6.25 percent bond, McIntosh said. “We will need to refinance the bulk of the issue.”
Lower Coupon
GTAA’s 5.3 percent bonds, due in February 2041, were priced to yield 146 basis points more than comparable federal benchmarks. The sale was completed after the company redeemed C$325 million of its 5.89 percent notes due in December 2013. While the early redemption triggered costs of C$27.6 million, GTAA expects the lower coupon will more than make up for the one-time expense.
By 2013, borrowers in Canada could pay as much as 1 percentage point more than they do now, McIntosh said.
“If there’s a normal economic recovery and we’re not in a recession, I think you are looking at rates of 100 basis points higher in a couple of years on the longer end of the yield curve,” he said. “Even credit spreads have been grinding in tighter in the last little while, so there’s the possibility of seeing a widening in credit spreads as well.”
Airport Expansion
GTAA plans to take on more debt after 2014 as a planned expansion, which includes building a new runway and a new pier, resumes, McIntosh said. By then, the company may borrow C$400 million to C$500 million annually “at the peak of construction,” he said.
Investor appetite for Canadian corporate bonds continues to be strong, McIntosh said, adding that he doesn’t expect the trend to change in the coming months.
“My sense is that the market is in good shape and demand is still there,” McIntosh said. “You always get little blips as the market digests new issuance, but in general the paper is well received.”
